starbucks4ever (95.74)

Did FNM and FRE get an offer they couldn't refuse?

4

Now that the free market is celebrating another triumph as FNM and FRE are being "taken over" by the government, I will ask one naive question. What if (suppose for the argument's sake) the shareholders (an unthinkable assumption, right?) don't intend to sell the companies to the government? As far as we know, Fannie and Freddie were not in bankruptcy as of Friday. And moreover, they did not announce bankruptcy either on Saturday or on Sunday. If I read the corporate law correctly, this should mean that both companies were still owned by their shareholders, is that right? So how come this private property suddenly winds up in the government's hands without a shareholder vote, and ligit owners still don't know how much they sold their company for? We thought such things happen only in Russia, right? Oh yeah, I forgot about Venezuela...

Fannie is and has been insolvent for at least 9 months. They were levered at least 80 to 1 so even a 1/2% loss in thier portfolio meant they were bankrupt. The government had no choice but taking down these companies. If anyone bought these companies thinking that Uncle Sam would make thier bad bets good, then they deserve to lose thier money. Freddie and Fannie would have eventually have died and would have taken the mortgage market with them. Paulson just put them out of thier misery.

Fannie is and has been insolvent for at least 9 months. They were levered at least 80 to 1 so even a 1/2% loss in thier portfolio meant they were bankrupt. The government had no choice but taking down these companies. If anyone bought these companies thinking that Uncle Sam would make thier bad bets good, then they deserve to lose thier money. Freddie and Fannie would have eventually have died and would have taken the mortgage market with them. Paulson just put them out of thier misery.

Since the GSE are quasi-government entities and their existence is really governed by law promulgated by the Congress - they are not really incorporated thru regular corporate route.

Yes in essence this is akin to the socialistic regimes you mentioned - but REALLY this is a bailout - what other choice is there - OTHER than the obvious one - let them go out and see how the system handles itself.

Hah? Let me get the facts straight. The government approaches a private company whose owners did not ask for any bailouts, and says to them: "You know, we think you need some help. Starting from today we'll take all your assets and maybe we'll pay you a small amount that we feel is what you want. What did you just say? That your equity is worth more than that? You are wrong. We feel it's worth a little more than zero. No, we don't think it will be a good idea for you to bargain with us over the price. What did you just say? No, you can't survive without us on your own. And, by the way, did I mention, starting from today, you're no longer working here." How is that different from Yukos?

No Morgan Stanley were asked to look at the FNM and FRE books and discovered they were cooked. The government had no choice. Freddie and Fannie exectuvies need to be in jail. Thier stock has been worth zero for a long while.

1. The governement takes an equity position in the company through the issue of special preferred shares to the government in exchange for assuming debt obligations. These shares will dilute the capital base for the common by 80%. In other words the government now owns 80% of the companies. The company common shares will open up on Monday trading at about $1. They will probably trade up to $1.80 in the first 4 hours as the shorts cover their positions and things settle out. The stock will slowly sink into the 30 to 50 cent range in the next few weeks or a month.

2. In January or February of next year, when the new administration takes over, the companies will be massively reorganized. Talk of the present value of the existing common is calculated by taking the existing net value of the company's assets and assigning their value to the bonds, then the government issued preferred shares first, then the regular preferred and then the common shares. The common shares end up with nothing in the recapitalization. Therefore they will go to zero by then.

I loved your first sentence so much I just had to recommend your post. If really figures that the Gov would pull this boner on a Sunday! The market shorts have beads of sweat forming as I write as they await the monsterous inflows of pre-market cash into the financials. They will be watching their demise when the bell sounds if they haven't already passed out from loss of blood. Of course I will have my sell orders placed so high that any big market order to fill will pay dearly. It will be on the par of selling a glass of water in the desret for $100K and ounce. Financial spreads will launch to infinity.